understanding expense ratios

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jumpin
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understanding expense ratios

Post by jumpin »

I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
exodusNH
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Re: understanding expense ratios

Post by exodusNH »

jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
Returns in the past were higher. The future returns are unknown.
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ruralavalon
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Re: understanding expense ratios

Post by ruralavalon »

exodusNH wrote: Tue Aug 03, 2021 11:53 am
jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
Returns in the past were higher. The future returns are unknown.
+ 1. You want something that may predict future returns.

Low expense ratios are critical to long-term investing performance. Seemingly small annual fees can have a large cumulative impact over time. Here is a "Mutual fund fees calculator" you could use to estimate the impact of investing expenses.

Also, low expense ratios are the best predictor of future performance. Morningstar, 8/9/10 . “If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.” “Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.”

"The expense ratio is the most proven predictor of future fund returns." "There are many other things to consider, but investors should make expense ratios their first or second screen." Morningstar, 5/5/18.

In general index funds have usually done better than actively managed funds. Please see:
Index Fund Advisors (10/7/2020), “SPIVA: 2020 Mid-Year Active vs. Passive Scorecard“, link.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Wiggums
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Re: understanding expense ratios

Post by Wiggums »

jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
$4 per $10,000 vs $79 per $10,000 is $75 higher annually.

If you have $100,000 invested, that $750 higher annually.

If you have $1,000,000 invested, that $7,500 higher annually.

You get the point. The higher cost is a drag on your earnings.
"I started with nothing and I still have most of it left."
02nz
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Re: understanding expense ratios

Post by 02nz »

jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
Growth funds have had a great run in recent years, but there tends to be a "reversion to mean." Over the entire history of the stock market, value funds have actually performed better, IIRC.

ETA: I don't have data for the entire history of the US stock market, but according to Portfolio Visualizer, from 1972 (as far as their data goes back to the present, large-cap value has outperformed large-cap growth: https://www.portfoliovisualizer.com/bac ... ion2_2=100
Last edited by 02nz on Tue Aug 03, 2021 12:11 pm, edited 1 time in total.
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iceport
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Re: understanding expense ratios

Post by iceport »

jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
I think the very first thing you need to understand is that the two funds hold different portfolios, even though they are both large growth funds, and that the difference in returns is due to the different stock holdings, not because the fund managers added any value. It's remotely conceivable that the actively managed fund performed better over the past year or so — a very short time! — due to skill. It's infinitely more likely that the very recent outperformance was simply due to the luck of their portfolio being better positioned to profit from the global pandemic — at least in the short term.

The next thing to realize is that there is no guarantee what performed better throughout the global pandemic thus far will continue to outperform in the future. It's quite possible, even likely, that at some point the market will benefit the large growth index over the actively managed blue chip growth portfolio.

However, while the future performance of the two funds is unknown and unknowable, you can be fairly certain that the actively managed fund will continue to be far more expensive than the index fund for many years to come.

So that's it, in a nutshell: FBGRX is very unlikely to outperform SCHG indefinitely, but very likely to continue to cost more, indefinitely.

If you want to change your allocation for the long term, and believe that an actively managed fund is a reasonable means of achieving your desired allocation, that's one thing. If, on the other hand, you're just blindly chasing performance, not only will you be paying more for your market exposure, you're also likely to underperform an allocation held passively for the long term.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
exodusNH
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Re: understanding expense ratios

Post by exodusNH »

ruralavalon wrote: Tue Aug 03, 2021 12:05 pm Low expense ratios are critical to long-term investing performance. Seemingly small annual fees can have a large cumulative impact over time. Here is a "Mutual fund fees calculator" you could use to estimate the impact of investing expenses.

Also, low expense ratios are the best predictor of future performance. Morningstar, 8/9/10 . “If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.” “Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.”

"The expense ratio is the most proven predictor of future fund returns." "There are many other things to consider, but investors should make expense ratios their first or second screen." Morningstar, 5/5/18.

In general index funds have usually done better than actively managed funds. Please see:
Index Fund Advisors (10/7/2020), “SPIVA: 2020 Mid-Year Active vs. Passive Scorecard“, link.
From this morning: https://www.npr.org/sections/money/2021 ... -investing
... The economists analyzed data on 783 big-time investors from January 2000 to March 2016. To give you a sense of how elite these investors are, they manage portfolios averaging almost $600 million. ...

But then the economists looked at these investors' performance when selling stocks. It turns out they're bad, much worse than the monkey. The stocks the investors sold ended up going up in value faster than the stocks they decided to keep. If their clients had instead hired the monkey with darts to randomly choose which stocks to sell, the clients' portfolios would have earned 0.8 percentage points more per year. ...
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goingup
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Re: understanding expense ratios

Post by goingup »

jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
The expense ratio is important. Most on this forum would consider .79 too high to invest in. Returns come and go but fees are forever, to paraphrase Jack Bogle.

Other considerations for you. Is your SCHG in a taxable account? If so, it likely has appreciated and selling will have tax consequences. Also, which broker do you use? If Schwab, then buying the Fidelity fund will have a purchase fee.

It's a good idea to consider the consequences of buying/selling funds, especially in a taxable account.
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jumpin
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Re: understanding expense ratios

Post by jumpin »

Thanks for the replies. Given that I have about 12-15 years left in my IRA investment portfolio before retiring, I am trying to maximize myself. I don't have the luxury of some that still have 20 or 30 years of investing. So in a way, I am chasing returns.

I should have mentioned, all my investments are all within the confines of an IRA that is held at Vanguard.
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Re: understanding expense ratios

Post by bogledogle »

jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
You will be giving away .72% of your portfolio every year to your brokerage. Imagine doing that for 30 years, how much does that add up to? If you would have kept .65% of those fees and compounded that over 30 years, that would be a lot of money. Make some assumptions and run a projection and see how much you would give away in gains.

You don't know how your fund will perform, but fees are deducted even if you got 0% return or a negative return. Between the funds you listed, SCHG outperformed FBGRX by 2.9% in the last year - but when you account for expenses SCHG would have outperformed by 3.65%.

Also, if you are stuck in a high fee fund in a taxable account, the only way to get out in the future is to sell and pay taxes on the gains - this adds even more drag to your portfolio if you change your mind in the future.
hi_there
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Re: understanding expense ratios

Post by hi_there »

I definitely wouldn't expect everyone to completely minimize expense ratio at the expense of fund quality, but 0.70%+ is a big hurdle for the more expensive fund to beat going forward.
bogledogle
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Re: understanding expense ratios

Post by bogledogle »

jumpin wrote: Tue Aug 03, 2021 12:54 pm Given that I have about 12-15 years left in my IRA investment portfolio before retiring, I am trying to maximize myself. I don't have the luxury of some that still have 20 or 30 years of investing. So in a way, I am chasing returns.
In that case you also do not have the luxury of picking high expense ratio funds and seeking underperformance. If you only have 12-15 years, you likely have some savings already - high expense ratio can eat your capital away if you underperform the market.

If chasing returns were as easy as picking a fund with a higher expense ratio, everyone would do it my dude.
exodusNH
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Re: understanding expense ratios

Post by exodusNH »

jumpin wrote: Tue Aug 03, 2021 12:54 pm Thanks for the replies. Given that I have about 12-15 years left in my IRA investment portfolio before retiring, I am trying to maximize myself. I don't have the luxury of some that still have 20 or 30 years of investing. So in a way, I am chasing returns.

I should have mentioned, all my investments are all within the confines of an IRA that is held at Vanguard.
You can't chase returns. That's the past. All you can do is invest for the future. Our best information tells us that low-cost funds are the best way to do that.
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Re: understanding expense ratios

Post by ruralavalon »

I should have said "welcome to the forum" :) .

jumpin wrote: Tue Aug 03, 2021 12:54 pm Thanks for the replies. Given that I have about 12-15 years left in my IRA investment portfolio before retiring, I am trying to maximize myself. I don't have the luxury of some that still have 20 or 30 years of investing. So in a way, I am chasing returns.

I should have mentioned, all my investments are all within the confines of an IRA that is held at Vanguard.
In your IRA at Vanguard I suggest very broadly diversified index funds (to reduce risk) with very low expense ratios (to increase your net returns). An example would be Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%.

What is your age?

Do you make the maximum annual contribution to your IRA?

Is there a plan offered at work like a 401k, 403b, 457b, SIMPLE IRA, SEP IRA, or TSP? If so do you contribute to that plan, and if so how much annually?

Establishing a high rate of contributions to investing is a better strategy than "chasing returns" .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
BobbyB
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Re: understanding expense ratios

Post by BobbyB »

So here's one related thing about expense ratios that I've never understood. When I see the 1 year or 10 year return of an ETF or mutual fund on Morningstar or in the prospectus, is that return before or after expenses?
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ruralavalon
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Re: understanding expense ratios

Post by ruralavalon »

BobbyB wrote: Tue Aug 03, 2021 3:17 pm So here's one related thing about expense ratios that I've never understood. When I see the 1 year or 10 year return of an ETF or mutual fund on Morningstar or in the prospectus, is that return before or after expenses?
Returns are reported after expenses.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
BobbyB
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Re: understanding expense ratios

Post by BobbyB »

ruralavalon wrote: Tue Aug 03, 2021 3:19 pm
BobbyB wrote: Tue Aug 03, 2021 3:17 pm So here's one related thing about expense ratios that I've never understood. When I see the 1 year or 10 year return of an ETF or mutual fund on Morningstar or in the prospectus, is that return before or after expenses?
Returns are reported after expenses.
So if that's true, then when I look at say the same kind of index fund, for example total market index funds such as VTSAX, FSKAX, FZROX, or SWTSX, then aren't expense ratios irrelevant? The returns reported by the fund account for everything --- the expense ratio, how "good" their index is, how efficient they are at tracking the index, etc.
exodusNH
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Re: understanding expense ratios

Post by exodusNH »

BobbyB wrote: Tue Aug 03, 2021 3:54 pm
ruralavalon wrote: Tue Aug 03, 2021 3:19 pm
BobbyB wrote: Tue Aug 03, 2021 3:17 pm So here's one related thing about expense ratios that I've never understood. When I see the 1 year or 10 year return of an ETF or mutual fund on Morningstar or in the prospectus, is that return before or after expenses?
Returns are reported after expenses.
So if that's true, then when I look at say the same kind of index fund, for example total market index funds such as VTSAX, FSKAX, FZROX, or SWTSX, then aren't expense ratios irrelevant? The returns reported by the fund account for everything --- the expense ratio, how "good" their index is, how efficient they are at tracking the index, etc.
That's why almost all of the index funds tracking index X have about the same ER. Certain funds might be more tax efficient or generate revenue by lending stocks. Smaller funds might only be able to hold a statistical sample of the funds they're tracking.

The Fidelity Zero funds track bespoke indexes and are mostly comparable to their standard peers, but may vary both because they're still new as well as slightly different holdings.
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jumpin
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Re: understanding expense ratios

Post by jumpin »

ruralavalon wrote: Tue Aug 03, 2021 2:38 pm I should have said "welcome to the forum" :) .

jumpin wrote: Tue Aug 03, 2021 12:54 pm Thanks for the replies. Given that I have about 12-15 years left in my IRA investment portfolio before retiring, I am trying to maximize myself. I don't have the luxury of some that still have 20 or 30 years of investing. So in a way, I am chasing returns.

I should have mentioned, all my investments are all within the confines of an IRA that is held at Vanguard.
In your IRA at Vanguard I suggest very broadly diversified index funds (to reduce risk) with very low expense ratios (to increase your net returns). An example would be Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%.

What is your age?

Do you make the maximum annual contribution to your IRA?

Is there a plan offered at work like a 401k, 403b, 457b, SIMPLE IRA, SEP IRA, or TSP? If so do you contribute to that plan, and if so how much annually?

Establishing a high rate of contributions to investing is a better strategy than "chasing returns" .
I'm 54 and for the last 11 years, I've been at a job that does not have a 401k. But I've taken my previous 401k's from all my former jobs and rolled them into single IRA. I had initially put my money with an independent financial guy - but he turned out to be just bad at his job. He was so worried about losing money, he forgot to help me grow my money. I went about 8 years making less returns than the S&P 500. Then I took it on myself and moved my money to Vanguard. In my portfolio, one of my investments VTI (which is essentially the VTSAX that you refer above). I do contribute the max to my IRA - since that is my only source of retirement investment. But given my story, you can probably understand my desire to make as much money as I can in the next 12 to 15 years.
exodusNH
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Re: understanding expense ratios

Post by exodusNH »

jumpin wrote: Tue Aug 03, 2021 5:11 pm
ruralavalon wrote: Tue Aug 03, 2021 2:38 pm I should have said "welcome to the forum" :) .

jumpin wrote: Tue Aug 03, 2021 12:54 pm Thanks for the replies. Given that I have about 12-15 years left in my IRA investment portfolio before retiring, I am trying to maximize myself. I don't have the luxury of some that still have 20 or 30 years of investing. So in a way, I am chasing returns.

I should have mentioned, all my investments are all within the confines of an IRA that is held at Vanguard.
In your IRA at Vanguard I suggest very broadly diversified index funds (to reduce risk) with very low expense ratios (to increase your net returns). An example would be Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%.

What is your age?

Do you make the maximum annual contribution to your IRA?

Is there a plan offered at work like a 401k, 403b, 457b, SIMPLE IRA, SEP IRA, or TSP? If so do you contribute to that plan, and if so how much annually?

Establishing a high rate of contributions to investing is a better strategy than "chasing returns" .
I'm 54 and for the last 11 years, I've been at a job that does not have a 401k. But I've taken my previous 401k's from all my former jobs and rolled them into single IRA. I had initially put my money with an independent financial guy - but he turned out to be just bad at his job. He was so worried about losing money, he forgot to help me grow my money. I went about 8 years making less returns than the S&P 500. Then I took it on myself and moved my money to Vanguard. In my portfolio, one of my investments VTI (which is essentially the VTSAX that you refer above). I do contribute the max to my IRA - since that is my only source of retirement investment. But given my story, you can probably understand my desire to make as much money as I can in the next 12 to 15 years.
The feeling is understandable! However, chasing returns is almost always a losing proposition. A low cost, total US market (plus total global if you're up for that) and some sort of bond fund are statistically best way to grow wealth. Of course, you can find counter examples, just like you can find that people who would have been killed in a car accident if that HAD been wearing their seatbelts. The lesson to take from the latter is not that seatbelts are bad since it ignores the 99%+ of people saved from worse injury because of the seatbelt.

This is why target date funds work so well. They prevent people from making very common financial mistakes. Our emotions get in the way of reality.
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Re: understanding expense ratios

Post by arcticpineapplecorp. »

Jack Bogle used to say, "Returns come and go but fees are forever."

others say, control what you can and don't worry about that which you can't control.

since you can't control returns, you have to accept what the market gives.

but you do have control over what your investments cost you. So control that because costs matter (the costs matter hypothesis):

https://www.google.com/search?client=fi ... hypothesis
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
hudson
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Re: understanding expense ratios

Post by hudson »

jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
FBGRX is just a stock fund. So are total stock market funds by Vanguard that have very low expenses.
For $100K in FBGRX, that's around $800 per year that you're paying them; that's money down the drain.
VTI (Vanguard total stock market) only costs $30 per year for $100K investment. I speculate that the extra money paid to Fidelity is dealer profit.
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ruralavalon
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Re: understanding expense ratios

Post by ruralavalon »

jumpin wrote: Tue Aug 03, 2021 5:11 pm
ruralavalon wrote: Tue Aug 03, 2021 2:38 pm I should have said "welcome to the forum" :) .

jumpin wrote: Tue Aug 03, 2021 12:54 pm Thanks for the replies. Given that I have about 12-15 years left in my IRA investment portfolio before retiring, I am trying to maximize myself. I don't have the luxury of some that still have 20 or 30 years of investing. So in a way, I am chasing returns.

I should have mentioned, all my investments are all within the confines of an IRA that is held at Vanguard.
In your IRA at Vanguard I suggest very broadly diversified index funds (to reduce risk) with very low expense ratios (to increase your net returns). An example would be Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%.

What is your age?

Do you make the maximum annual contribution to your IRA?

Is there a plan offered at work like a 401k, 403b, 457b, SIMPLE IRA, SEP IRA, or TSP? If so do you contribute to that plan, and if so how much annually?

Establishing a high rate of contributions to investing is a better strategy than "chasing returns" .
I'm 54 and for the last 11 years, I've been at a job that does not have a 401k. But I've taken my previous 401k's from all my former jobs and rolled them into single IRA. I had initially put my money with an independent financial guy - but he turned out to be just bad at his job. He was so worried about losing money, he forgot to help me grow my money. I went about 8 years making less returns than the S&P 500. Then I took it on myself and moved my money to Vanguard. In my portfolio, one of my investments VTI (which is essentially the VTSAX that you refer above). I do contribute the max to my IRA - since that is my only source of retirement investment. But given my story, you can probably understand my desire to make as much money as I can in the next 12 to 15 years.
Sorry you don't have a work-based plan you might contribute to.

A high rate of contributions is still a better strategy than taking undue risk stretching for higher returns.

In addition to making the maximum annual contributions to your IRA, I suggest starting a taxable brokerage account at a low cost provider like Vanguard, and investing in very tax-efficient stock index funds or stock index exchange traded funds (ETFs).

Please see these two wiki articles:
1) "Prioritizing Investments", link; and
2) "Tax-efficient Fund Placement", link
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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jumpin
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Re: understanding expense ratios

Post by jumpin »

hudson wrote: Wed Aug 04, 2021 8:44 am
jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
FBGRX is just a stock fund. So are total stock market funds by Vanguard that have very low expenses.
For $100K in FBGRX, that's around $800 per year that you're paying them; that's money down the drain.
VTI (Vanguard total stock market) only costs $30 per year for $100K investment. I speculate that the extra money paid to Fidelity is dealer profit.
This is what I don't understand. Yes, the expense one pays is higher. But no one ever sees that expense/deduction. You can only measure your returns. That's why I had initiated this thread. From my simple mind, it seems all anyone can do is measure the "return".
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retired@50
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Re: understanding expense ratios

Post by retired@50 »

jumpin wrote: Wed Aug 04, 2021 1:22 pm
hudson wrote: Wed Aug 04, 2021 8:44 am
jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
FBGRX is just a stock fund. So are total stock market funds by Vanguard that have very low expenses.
For $100K in FBGRX, that's around $800 per year that you're paying them; that's money down the drain.
VTI (Vanguard total stock market) only costs $30 per year for $100K investment. I speculate that the extra money paid to Fidelity is dealer profit.
This is what I don't understand. Yes, the expense one pays is higher. But no one ever sees that expense/deduction. You can only measure your returns. That's why I had initiated this thread. From my simple mind, it seems all anyone can do is measure the "return".
The mistake you're making is that your mind is latching onto the past returns of the Fidelity fund (FBGRX) and assuming that its good performance will continue into the future. You're recognizing a pattern that may not be a pattern at all, it might be luck.

Regards,
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hnd
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Re: understanding expense ratios

Post by hnd »

while SCHG is only 11 years old, it basically tracks the large cap growth index. if we instead use VIGRX to track it back to 1992, there is one thing that is very clear comparing the lcg index to FBGRX. regular reversion to the mean. meaning they intersect regularly. so whether one is better than the other for your specific dollars revolves around when you put your money in. your likely best bet over the long haul is to invest in the one that is currently losing! crazy right?

each one has to overcome its costs before its published NAV. and when you take into consideration that overperformance over a long period of time is meerly a crapshoot, it makes sense to choose the low cost option much of the time.
hudson
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Re: understanding expense ratios

Post by hudson »

jumpin wrote: Wed Aug 04, 2021 1:22 pm
hudson wrote: Wed Aug 04, 2021 8:44 am
jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
FBGRX is just a stock fund. So are total stock market funds by Vanguard that have very low expenses.
For $100K in FBGRX, that's around $800 per year that you're paying them; that's money down the drain.
VTI (Vanguard total stock market) only costs $30 per year for $100K investment. I speculate that the extra money paid to Fidelity is dealer profit.
This is what I don't understand. Yes, the expense one pays is higher. But no one ever sees that expense/deduction. You can only measure your returns. That's why I had initiated this thread. From my simple mind, it seems all anyone can do is measure the "return".
I agree, expenses are invisible. FBGRX obviously did well in the past. Why did FBGRX do well? Maybe they were buying some risky stocks that paid off. I doubt if the managers of FBGRX are any smarter than Vanguard's total stock market or Vanguard's S&P 500 fund managers. If Fidelity had not taken that high expense amount out of the fund, the fund holders could have had the money.
I'm sure there's a better explanation than I'm giving.

Bottom Line: I want to buy a fund where the fund managers and owners operate frugally and don't bleed money out of the fund. .79% is excessive. I hope that it's not a load fund.
f35phixer
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Re: understanding expense ratios

Post by f35phixer »

this is eye opening, using ER calculator !!!!

I am selling SGRAX and two others and going with FSKAX!!! the ten year difference of 1.1% vise .015 % is staggering for SGRAX of 260K !!!!!!!!!!!!!!
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jumpin
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Re: understanding expense ratios

Post by jumpin »

hudson wrote: Wed Aug 04, 2021 3:10 pm
jumpin wrote: Wed Aug 04, 2021 1:22 pm
hudson wrote: Wed Aug 04, 2021 8:44 am
jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
FBGRX is just a stock fund. So are total stock market funds by Vanguard that have very low expenses.
For $100K in FBGRX, that's around $800 per year that you're paying them; that's money down the drain.
VTI (Vanguard total stock market) only costs $30 per year for $100K investment. I speculate that the extra money paid to Fidelity is dealer profit.
This is what I don't understand. Yes, the expense one pays is higher. But no one ever sees that expense/deduction. You can only measure your returns. That's why I had initiated this thread. From my simple mind, it seems all anyone can do is measure the "return".
I agree, expenses are invisible. FBGRX obviously did well in the past. Why did FBGRX do well? Maybe they were buying some risky stocks that paid off. I doubt if the managers of FBGRX are any smarter than Vanguard's total stock market or Vanguard's S&P 500 fund managers. If Fidelity had not taken that high expense amount out of the fund, the fund holders could have had the money.
I'm sure there's a better explanation than I'm giving.

Bottom Line: I want to buy a fund where the fund managers and owners operate frugally and don't bleed money out of the fund. .79% is excessive. I hope that it's not a load fund.
Thanks for the replies. I'm still learning. Since I've taken over my portfolio from my former bad investment guy, I've been learning on the fly. This expense ratio stuff had just confused me. The good news is that I did learn what a "load fund" was - unfortunately it was a lesson learned the hard way. Besides having both VOO and VTI, I want to have a more aggressive growth investment in my portfolio. Currently it's SCHG - but just been exploring other options and that's when I came across Fidelity's FBGRX. But only in the "looking" stages right now. Made too many mistakes to rush into any decisions.
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nisiprius
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Re: understanding expense ratios

Post by nisiprius »

jumpin wrote: Tue Aug 03, 2021 11:05 am I read a lot on this board that when someone is invested a mutual fund, the reply I see is people suggesting they change to a lower cost etf. As a part of my portfolio, I keep a portion in large cap growth. I've been invested in Schwab US Large-Cap Growth ETF (SCHG), but was looking to sell and change a mutual fund Fidelity Blue Chip Growth (FBGRX). The expense ratio for SCHG is .04% and the fund FBGRX is .79. I realize that's a big difference, but if the returns are much bigger, then does that expense ratio really matter. Help me understand.
All stated "total return" and "average return" numbers for mutual funds are indeed net of expenses.

Anybody can look and see on Fidelity's website that as of 6/30/2021,
--over the last ten years FBGRX averaged 20.32%/year while
--SCHG returned 17.71%/year.

So, yeah, despite the higher expense ratio, an investor who put equal amounts of money into the two funds ten years ago would have more in FBGRX today.

If past performance persisted then it would be true that the expense ratio doesn't matter. If you had a guarantee that over the next ten years FBGRX would return 2.61% per year more than SCHG, then it would make sense to use FBRGX.

But just as the disclaimer says, "The performance data featured represents past performance, which is no guarantee of future results." The reason it's there is that it's true. I'm not clear why people don't believe it. Now let me be clear, 0.79% is not a huge number, but Morningstar calls it "average." They dont' call it "below average" or "low."

And what Morningstar has found is that Fund fees predict future success or failure. That is, even though a fund with higher fees may perform better, net of fees, than one with lower fees, statistically low-fee funds do better.
The expense ratio is the most proven predictor of future fund returns. We find that it is a dependable predictor when we run the data. That's also what academics, fund companies, and, of course, Jack Bogle, find when they run the data.
Meanwhile, FBGRX is an actively managed fund in the US large growth category. Over the past twenty years, according to the S&P SPIVA Scorecard, p. 9, a staggering 96.46% (!!!!) of actively managed U.S. large growth mutual funds underperformed a large growth index. About 80% of over the last ten years, which is as long as SCHG has been out.

Image

Now let me be very clear. FBGRX, it seems, is one of the 4% of actively managed funds that did outperform an appropriate benchmark index over the last twenty years. One out of twenty-five.

Source

Image

And yet, if you look at performance for 2003-2020, most of that difference goes away.

Image

Puzzling, isn't it?

So what on earth can we say?
  • In the past, FBGRX would have made you more money than SCHD, after expenses.
  • But the vast majority of U.S. large cap active funds--80% of them during the ten years SCHD has existed--would not have.
  • Past performance is no guarantee of future results.
  • Morningstar says expense ratio, while no guarantee either, is the "most proven predictor" they know.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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